California Universities Feel the Squeeze

California's role as the incubator of talent that powers Silicon Valley and Hollywood owes much to a university system that has produced 56 Nobel Prize winners. Now, as Governor Jerry Brown tackles a crippling deficit, his plan to slash higher education spending by 16 percent is raising concerns that the state may be jeopardizing the future of its high-tech and entertainment industries—and by extension the country's growth.

From the University of California, Berkeley, ranked the nation's top public university by U.S. News & World Report, to San Jose State University, which each year graduates more than 1,000 engineering students, the state's 33 public institutions are the birthplaces of companies and the sources of upward mobility for 650,000 students. That talent pool may be limited if the university system can no longer guarantee admission to the top 12.5 percent academic performers of California's high school seniors, and applicants are deterred as annual tuition for residents, less than $4,500 a decade ago, rises to at least $11,124 in the next school year. Mitch Kapor, founder and chief executive officer of Lotus Development, who invests in technology startups, says Brown's proposed cuts could have a lasting effect on the vitality of a state that's home to 14 percent of the companies in the Standard & Poor's 500-stock index, including Google (GOOG), Apple (AAPL), and Walt Disney (DIS). "Failing to continue to support the public higher ed system in California will have devastating long-term consequences," Kapor says.

Trimming the state's $25.4 billion deficit by cutting university budgets could make California's fiscal situation worse by stifling job creation and reducing the tax base, says Robert R. Ackerman, managing director of Allegis Capital, a Palo Alto (Calif.) firm that invests in computer networking and software companies. "It's ass-backwards, it's upside-down, it's stupid," he says. "We're reducing the ability to create the next generation that is going to create the jobs that [are] going to pay the pension obligations that this state has."

California, which aims to reduce its costs by $1.4 billion, isn't alone. Florida lowered its general revenue spending for 28 public colleges and 11 universities by 14 percent over the past three years. Funding in 2010 for the State University of New York, a system of 64 colleges and universities, fell $355 million, to $8.09 billion, for the fiscal year ending in March. Those cuts will reverberate, says Jeffrey R. Immelt, chairman and CEO of General Electric (GE). "We hire thousands of college grads in the U.S.," Immelt said at the Consumer Electronics Show in Las Vegas on Jan. 7. "That, for us, is our lifeblood."

The spending cuts also pose a threat to America's ability to compete in the global economy. China has identified seven universities that it will fund at a higher rate and aims to elevate Peking University and Tsinghua University into the top 20 in the world, according to a 2010 article in Foreign Affairs magazine by Yale University President Richard C. Levin.

To educate its growing population, India needs 600 more universities and 35,000 additional colleges, Human Resources Minister Kapil Sibal said in November. The country is seeking foreign universities to partner with Indian institutions and has attracted interest from Duke University, Boston University, and Georgia Institute of Technology. "Right now, if I were the Chinese university system, I'd be running ads showing up on UC's websites, recruiting students to universities in Beijing and Shanghai," Ackerman says.

The bottom line: Plans by California to reduce higher education spending by $1.4 billion could backfire long term by cutting job growth and tax revenue.